TL;DR - SUMMARY
Transaction fees serve two essential purposes when it comes to blockchain networks. They reward miners or validators who help confirm transactions and help protect the network from spam attacks.
Transaction fees can be small or large, depending on network activity. Market forces can also influence the commissions you pay. While high fees can hinder broader blockchain adoption, very low fees could lead to security issues.
Why transaction fees?
Transaction fees are and have been an essential part of most blockchain systems since their inception. It is very likely that you have encountered them when sending, depositing or withdrawing cryptocurrencies.
Most cryptocurrencies use transaction fees for two important reasons. First of all, commissions reduce the amount of spam on the network. They also make large-scale spam attacks expensive to implement. Secondly, transaction fees act as an incentive for users who help verify and validate transactions. Think of it as a reward for helping the network.
For most blockchains, transaction fees are reasonably cheap, but can get quite expensive depending on network traffic. As a user, the amount you choose to pay in fees determines the priority of your transaction to be added to the next block. The higher the commission paid, the faster the confirmation process will be.
Bitcoin transaction fees
As the world's first blockchain network, Bitcoin set the standard for transaction fees used by many cryptocurrencies today. Satoshi Nakamoto realized that transaction fees could protect the network from large-scale spam attacks and incentivize good behavior.
Bitcoin miners receive transaction fees as part of the process of confirming transactions in a new block. The pool of uncommitted transactions is called a memory pool (or mempool). Naturally, miners will prioritize transactions with higher fees, which users agreed to pay by sending their BTC to another bitcoin wallet.
Malicious actors who wish to slow down the network must pay a fee associated with each transaction. If they set the fee too low, miners are likely to ignore your transactions. If they are placed at an adequate level, they incur a high economic cost. Therefore, transaction fees also act as a simple but effective spam filter.
How are BTC transaction fees calculated?
On the Bitcoin network, certain crypto wallets allow users to set their transaction fees manually. It is also possible to send BTC with zero commission, but such transactions will most likely be ignored by miners, meaning they will not be validated.
Contrary to what some tend to believe, Bitcoin fees do not depend on the amount sent but on the size of the transaction (in bytes). For example, imagine your transaction size is 400 bytes and the average transaction fee is now 80 satoshis per byte. In that case, you would have to pay around 32,000 satoshis (or 0.00032 BTC) to have a good chance of your transaction being added to the next block.
When network traffic is high and there is a high demand to send BTC, the transaction fee required for a quick confirmation increases as other bitcoin users try to do the same. This can occur during periods of intense market volatility.
As such, high fees can make it difficult to use BTC in everyday situations. Buying a $3 cup of coffee might not be practical if the commissions are much higher.
Only a certain number of transactions can be included within a block, which has a limit of 1 MB (i.e. the block size). Miners add these blocks to the blockchain as quickly as possible, but there is still a limit to how fast they can go.
The scalability of cryptocurrency networks is a crucial issue here in deciding network fees. Blockchain developers are making continuous efforts to address the problem. Previous network upgrades have helped improve scalability, such as the implementation of SegWit and Lightning Network.
➟Are you thinking about getting started in the world of cryptocurrencies? Buy Bitcoin on Binance!
Transaction fees on Ethereum
Ethereum transaction fees work differently compared to Bitcoin. The fee takes into account the amount of computing power needed to process a transaction, known as gas. Gas also has a variable price measured in ether (ETH), the network's native token.
While the gas needed for a specific transaction may remain the same, gas prices may rise or fall. The price of gas is directly related to network traffic. If you pay a higher gas price, miners will likely prioritize your transaction.
How are transaction fees calculated on Ethereum?
The total gas fee is simply a price that covers the cost, plus an incentive to process your transaction. However, you should also consider the gas limit, which defines what the maximum price paid for that transaction or task is.
In other words, the cost of gas is the amount of work required and the price of gas is the price paid for “each hour” of work. The relationship between these two and the gas limit defines the total fee for an Ethereum transaction or smart contract operation.
For example, if a certain transaction costs 21,000 Gwei and the gas price is 71 Gwei, the transaction fee will be 1,491,000 Gwei or 0.001491 ETH.
Source: Etherscan.io
As Ethereum moves towards a Proof of Stake model (see Casper), there is an expectation that gas fees will decrease. The amount of gas needed to confirm a transaction will be less as the network will need only a fraction of the computing power to validate transactions. But, network traffic can still affect transaction fees, as validators prioritize transactions that pay the most.
Transaction fees on Binance Chain
Binance Chain is a blockchain network that allows users to transact and trade BNB and other BEP-2 tokens. They can also create and distribute their own tokens. Binance Chain adopts a consensus mechanism called Delegated Proof of Stake. So instead of miners, we have validators.
Binance Chain also powers Binance DEX (decentralized exchange), where users can trade crypto assets directly from their wallets. Transaction fees on Binance Chain and DEX are paid in BNB.
Please note that Binance Chain and Binance Smart Chain are two different blockchains. For more information, see Getting Started with Binance Smart Chain (BSC).
How are Binance Chain transaction fees calculated?
Depending on the action you wish to take, a commission structure indicated in BNB will apply. There is a difference between transaction fees, such as sending BNB, and trading fees on Binance DEX. Additionally, the total price of a transaction may rise or fall depending on the market price of BNB.
When performing non-trading transactions, such as withdrawing or depositing BNB to a wallet, fees are paid only in BNB. Commissions for trading-related activity on Binance DEX are paid in the traded token, but there is a discount for paying in BNB. This scheme helps encourage BNB adoption and develop its user base.
Transaction fees on Binance Smart Chain
Binance Smart Chain (BSC) is another blockchain built by Binance, which runs in parallel to Binance Chain (i.e. two separate networks). While the BNB running on Binance Chain is a BEP-2 token, the BNB on the BSC is a BEP-20 token.
Binance Smart Chain allows the creation of smart contracts, making it more customizable. The fee structure for BSC is not fixed like Binance Chain. Instead, a gas system (similar to Ethereum) is used, which reflects the computing power needed to execute transactions and smart contract operations.
The BSC network runs a Proof of Stake Authority consensus mechanism. Network users must stake BNB to become a validator, and upon successful validation of a block, they receive the included transaction fees.
How are transaction fees calculated on Binance Smart Chain?
As mentioned, the BSC fee structure is very similar to that found on Ethereum. Transaction fees are indicated in Gwei, which is a small denomination of BNB equal to 0.000000001. Users can set gas prices to prioritize their transactions added to the block.
To find out the current and historical average gas price, BscScan provides a daily average along with the lowest and highest price paid. As of March 2021, the average commission at BSC is around 13 Gwei.
In the following example, the price of gas was 10 Gwei. Please note that the gas limit was set at 622,732 Gwei, but only 352,755 (52.31%) Gwei was used in this transaction, resulting in a transaction fee of 0.00325755 BNB.
Source: Bscscan.com
BSC fees are usually very low, but if you try to send tokens without BNB in your account, the network will notify you that you do not have enough funds. Make sure you have some extra BNB in your wallet to pay the transaction fees.
Withdrawal fees on Binance
When you make a withdrawal on the Binance exchange, you must pay the associated transaction fees. These fees vary depending on the cryptocurrency and network you use. Binance has its own fee structure for transactions that occur within its trading platform. However, withdrawal fees are affected by external factors that are not under Binance's control.
Withdrawing your crypto depends on the work of miners or validators who are not part of the Binance ecosystem. As such, Binance has to adjust withdrawal fees periodically, depending on network conditions including traffic and demand.
Binance also sets minimum limits on the amount of crypto that can be withdrawn. You can check the current limits on the Commission Program page
Trading fees are based on your account's VIP level and are independent of withdrawal fees. Your accumulated monthly trading volume determines your account's VIP level. The maximum commission currently charged is 0.1% of cryptocurrencies traded as a maker or taker. Please note that users who pay in BNB will have lower fees when trading.
In conclusion
Transaction fees are an integral part of the cryptoeconomics of blockchain networks. They are part of the incentives given to users who keep the network running. Commissions also offer a layer of protection against malicious behavior and spam.
However, the amount of traffic some networks receive has resulted in significantly higher commissions. The decentralized nature of most blockchains makes it more difficult to scale them. It is true that some networks feature high scalability and transaction throughput, but that often comes with a sacrifice of security or decentralization.
Still, there are several researchers and developers working on improvements that will hopefully bring more inclusivity when it comes to cryptocurrencies in the developing world.
